Meal Kit Start-Ups Have The Economics All Wrong

One of the more interesting business models to have come out of Silicon Valley lately is “meal kit deliveries.” This is where companies like Blue Apron and Plated come up with a meal idea, pre-measure all the ingredients, and mail it to you as a subscription service. There seems to be a general demand for this kind of service, so I think it succeeds in that regard. But I think the economics of it won’t work in the long run.

The short explanation is this: incumbent grocery stores and restaurants have huge competitive advantages in being the providers of meal kits. The problem a start-up needs to solve is creating the platform for these providers.

Meal kit companies operate somewhere in between a restaurant and a grocery store. They take things one step farther than the grocery store (by prepping the ingredients for meals), and one step less than the restaurant (by not cooking the meal). All meal kit companies offer beyond that is a website and a delivery service.

Next consider the simultaneous problems that grocery stores and restaurants must solve. First, they must match local demand for food by variety, healthiness, quality, and cost. Second, they must hire employees in a way that optimizes the quality/cost tradeoff by accounting for local labor markets. Third, they must source food suppliers in a way that optimizes the quality/cost tradeoff and accounts for local and regional supply conditions. And they must solve all these problems jointly, as the optimal answers to one problem depends on the other problems.

Solving these problems is hard, and incumbent grocery stores and restaurants have a competitive advantage by already having solved this.

Of course there are nationwide restaurant chains that do manage to have centralized decision-making and operate all over the country in local markets. However, there is usually a significant homogeneity factor in their favor. They are sourcing the same basic ingredients all over the country to make the same basic meals all over the country. In addition, there is little change over time in what is offered, e.g. mostly hamburgers or burritos. This means you can mostly solve the problem once and it is done. In contrast, a meal kit company is going to have to offer greater variety with more change than most national restaurant chains do. And note that even with all the homogeneity, many national chains find franchising to be necessary to solve some local knowledge problems.

National or regional grocery chains exist too of course. But they don't have to solve the coordination problem meal kit companies face of offering the exact same thing to everyone across the country. If plums are available at a reasonable price in the area, they can offer them without having to decide if plums are available at a reasonable price at locations across the U.S.

This isn’t to say that Silicon Valley based meal kit companies can’t figure out who are the optimal local suppliers of food in markets all over the country, but can they do this as well as the incumbent grocery stores who have already done this?

Really these start-ups are like a brand new restaurant and grocery chain hoping to operate nationally. That's a huge challenge! There are two reasons they are succeeding so far.

First, grocery stores themselves don’t realize this is a product space they need to be in.

And second, because Silicon Valley hasn’t realized that the right model for a meal kit company is a platform and not a supplier.

The economics of this product cry out for a platform. Incumbent grocery stores and restaurants have all the competitive advantages to be meal kit providers, but they need a platform that makes this new product idea understandable and easy for customers.

The other platform advantage is that it allows customers a ton of variety in one place. Meal kit companies can then specialize in geographic and other niches. A paleo meal kit company for Northern California, a vegan meal kit company for the Portland, a salad meal kit company for New York City. Instead of having to google to see if these companies exist, or to figure out what the local options even are, customers can go to one platform and browse.

Anyway, I’ve gone on long enough about this I think you get the picture. The economics all suggest this should be a platform, and that incumbent grocery stores and restaurants have the competitive advantages as providers.

ADDENDUM: One thing I forgot to mention. Local meal kit suppliers would have another advantage: customers can pick up the meal kits on the way home from work. And lower fixed costs to operating this service on the margin than a start-up. And other competitive advantages associated with brand awareness. I could go on and on.

I'm an economist at Moody's Analytics, where I cover labor markets and other aspects of the U.S. economy. My opinions expressed at this blog are his own and do not reflect the views of anyone but myself, and all the other usual blogging caveats apply. I can be reached at ad...

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